Foundations of Airline Finance

Methodology and Practice

Bijan Vasigh, Zane C. Rowe

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781138367814
• eBook ISBN: 9780429769542
• Edition: 3
• Topic: Technology & Engineering
• Subtopic: Business General
• Index: Technology & Engineering

There are few industries that have had a more profound impact on business and society over the last century than aviation. This book is an accessible, up-to-date introduction to the current state of the aviation industry which provides readers with the tools necessary to understand the volatile and often complicated nature of airline finance.

Understanding finance is critical in any industry; however, the financial track record of the airline industry places even more importance on effective financial management. Foundations of Airline Finance provides an introduction to the basics of finance – including time value of money, the valuation of assets, and revenue management – and the particular intricacies of airline finance where there can be wild fluctuations in both revenues and costs. The third edition of this text has been extensively updated to reflect the many changes in the air transport industry that have taken place since the publication of the second edition, and features an expanded chapter on aircraft leasing and many new international case examples.

This thorough introduction to aviation finance is valuable reading as a general, introductory financial text, or as reading in specialized airline finance classes.

Part 1
Theoretical aspects of airline finance

1 Airline finance

An overview

In the two weeks since assuming his role as CEO of Air France-KLM, Ben Smith has already made several changes aimed at breaking the deadlock with Air France unions and bringing the loss-making French unit back to profitability. He has assumed the chief executive position of Air France from Franck Terner and the airline’s head of human resources, Gilles Gateau, is leaving… . A syndicate of nine trade unions representing pilots, cabin crew, and ground and maintenance staff at Air France is meeting with Smith today to discuss their long-standing wage increase demand, an explosive issue that led to 15 days of strikes earlier this year.

– Aviation International News October 1, 2018

In 2018, the air transport industry is expected to handle over 4 billion passengers around the globe. With more than 1,000 commercial airlines flying passengers internationally, the major challenge facing the industry is a recurrent lack of profitability. Only a handful of airlines, such as Southwest Airlines, Ryanair, Singapore Airlines, Copa Airlines, and Emirates have remained profitable on an ongoing basis, while many others have been forced into liquidation and bankruptcy. Nonetheless, the current market outlook is strong, and airline managers are faced with both opportunities and challenges. There are countless variables airlines have no control over, but numerous others that can be creatively managed. The industry is predominantly vulnerable to exogenous shocks such as fuel prices, threat of terrorism and weather conditions. The air transport demand is highly volatile and subject to daily, seasonal, and cyclical fluctuations. With that in mind, this text is directed toward serving aviation professionals, financial managers, and students who plan to pursue their education in the field of aviation. Our aim is to provide the fundamental tools required to exercise such management expertise by successfully analyzing an airline’s business model and helping shape the organization for financial prosperity. It has been said that finance is the life blood of business, and that is why finance often plays a prominent role in business. In fact, successful airline CEOs once held finance positions within their organizations.

While the tools of finance are universal, the goal of this text is to present the specifics of airline finance in a real and practical sense. However, prior to a detailed explanation of various financial tools, this chapter will provide an overview of the role of finance in industry, and in particular, the airline industry. The globalization of the airline industry and the financial consequences of these developments are discussed. In addition, the chapter also introduces the reader to the important concepts of accounting and economic profits. This chapter also provides an overview of the various forms of business that a firm might choose and how each might affect the organization’s finances. The following topics are covered in this introductory chapter:

• Introduction and historical background
  • Bankruptcies and consolidation
• The international nature of the aviation industry
• Objectives of airlines
• Accounting profit
• Economic profit
• Business organizational structures
  • Sole proprietorships
  • Partnerships
  • Corporations
  • Not-for-profit organizations
• Comparison of business structures
• Agency issues
• Financial markets
  • Primary markets
  • Secondary markets
  • Money markets and capital markets
• The federal taxes structure
• Summary
• Discussion questions and problems

Introduction and historical background

Finance is a diverse and broad field that deals with ensuring that a company has the financial resources (both fixed assets as well as more liquid assets) to not only operate successfully in the short term, but also help position the company for long-term value creation. Long-term prosperity is critical to every industry, and the airline industry is no exception; therefore, financial management, together with economists, plays an essential role in maintaining a sound and efficient airline operation. Finance touches every facet of an airline, affecting not only short-term decision-making, but more importantly, long-term strategic planning.

American was the only U.S. legacy airline that hadn’t yet filed for bankruptcy, but on November 29, 2011 it joined a long list of airlines that have filed for bankruptcy protection. Several airlines have filed multiple times, including US Airways, Continental, Delta, and Northwest. There are about 189 U.S. airlines that have gone out of business over the past ...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• About the authors
• Foreword
• Foreword
• Foreword
• Preface to the third edition
• Acknowledgments
• List of abbreviations
• Part 1 Theoretical aspects of airline finance
• Part 2 Airline accounting and finance
• Part 3 Airline capital budgeting
• Part 4 Practical applications of airline finance
• Enhanced equipment trust certificates (EETCs)
• 14 Airline revenue management
• Glossary of Terms
• Index